Addressing Financial Risk During a Market Downturn
Concerned about the recent market volatility? Unsure about whether you should revisit your financial plan? You’re not alone! Turbulent times can create uncertainty, but it is important to make sure any changes to your investments are methodical and not a stress reaction.
Risk is an inevitable part of investing; without it there is no growth. However, too much of it, or the wrong kind, can quickly derail your financial future. The key is in striking the right balance, recognizing where risk exists in your strategy, and managing it before it is too late.
There are key considerations to keep in mind that will help you approach risk with clarity and confidence while increasing your chances of long-term success. Here are a few:
Risk tolerance: This is all about your comfort level with riding the ups and downs of the market. Your financial professional should have tools to help quantify your risk tolerance in advance and build a plan that ensures you don’t panic in moments of market volatility. If you haven’t specifically addressed this, don’t wait to review your allocations with a professional you trust.
Risk capacity: While tolerance is about emotions, capacity is about what you can truly afford to take on. Tolerance is heart; capacity is math. Does your plan ensure they work together? Even if you are fine with taking larger risks, your portfolio may not be able to support those positions. Being aggressive can backfire. If larger losses are incurred, do you have time to rebuild?
Shallow risk: This has to do with addressing the daily ups and downs of the market. Stocks will always rise and fall, sometimes meaning a loss of thousands of dollars in a day. It may sting, but it isn’t permanent unless you sell during that downturn. Shallow risk is inevitable if you’re invested in liquid securities. There is no avoiding it, but you can manage your reaction. Maintaining strong emergency reserves can help you keep your eye on the long-term prize.
Deep risk: While shallow risk is temporary, deep risk is quite the opposite. Deep risk permanently impairs your capital, making recovery unlikely. A number of factors can send your portfolio upside down, but the most relevant currently is inflation. We are all feeling the pain of it now, as we are keenly made aware of when walking the aisles of the grocery store. One strategy is overweighting a diversified portfolio in equities. It isn’t a perfect solution, nor is it the only one, but it can help preserve buying power.
Concentration risk: Simply put, this type of risk happens when too much of your money is tied to only a few types of investments. This can be unintentional, such as when employees are paid largely in company stock and therefore tie a majority of funds to one asset. Some do this consciously, like when investors riding the long bull market poured money into the tech market only to feel the pain when Nasdaq dropped by 30%. Proper diversification matters! It may not guarantee profits, but it helps reduce volatility and risk and can protect growth.
Liquidity risk: If there is a possibility you won’t be able to sell your investments at the rate or in the timeline needed, you have a liquidity problem. This can be countered by maintaining a cash cushion and understanding the process for liquidating investments in your portfolio.
Credit risk: This type of risk is most commonly associated with bonds, which is basically lending money to a corporation or the government with the expectation that they will reimburse you. When investing in the bond market it is essential to review the bond ratings. Lower ratings may promise to pay more, but they also come with the risk that they are junk bonds where you could lose money. Balance and due diligence are critical in these investments.
Interest rate risk: Closely related to credit risk, bond prices move inversely to interest rates. Bond values decrease when rates go up. One way to lessen the risk of aggressive rate hikes is to minimize the duration of your bond holdings. The shorter the duration, the less impact rising rates will have on their value. Effectively this means that having shorter duration bonds help you maintain more control when interest rates shift.
Horizon risk: Life happens. Unexpected personal events can affect your investment timeline. Disability, job loss, and death are a few examples of occurrences that can quickly alter how long your investments need to last. While you can’t predict these events, it is critical that you prepare for them. Proper insurance and a robust emergency fund can help you stay afloat. A complete financial plan should address these possibilities in advance. Horizon risk is about resilience; it’s about making sure your strategy can address these risks when life throws you a curveball.
How can your financial professional help with all of this? Our role is to help you identify where risk lives in your financial life, measure how much you can truly take on, and design strategies that protect against the unexpected.
With the right perspective, guidance, and discipline, risk becomes a tool for growth rather than a threat.
Readers can call our office at 423-589-0154 or to schedule a no-cost, no-pressure consultation HERE. At Money Mavens, we meet you where you are and help you get where you want to be on your terms.
Earn. Keep. Grow.
Joanna Nash, Founder of Money Mavens, LLC
Sources:
https://www.kiplinger.com/investing/managing-financial-risk-in-market-downturns
Disclosures:
All matters discussed in this article are for informational purposes only. Opinions expressed are solely those of Money Mavens LLC, and staff. All topics covered are believed to be from reliable sources; however, Money Mavens LLC, makes no representations as to its accuracy or completeness. This commercial shall in no way be construed as a solicitation to sell securities or advisory services. Topics should be discussed with your individual adviser prior to implementation. Insurance products and services are offered through individual carriers, affiliated companies. Money Mavens LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.
